New York Times

Money Tap Loosens, But Rules Tighten

By TRACIE ROZHON

Jan. 26, 1997

THE way developers and bankers
tell the stories, Manhattan was like the Wild West during a good part of the
1980's: Bankers were lending developers money with flimsy pay-back guarantees;
in some cases, without any money down. Loans were handed out based on inflated
estimates. Approvals were taken for granted -- some developers started to dig
foundations for their tall apartment towers before they even held the deed to
the land. Money was flowing.

The tap was abruptly switched off
after the stock market slide of 1987. But now, with a soaring rental market and
a steadily climbing sales market, bankers and developers say the tap has been
opened, to at least a trickle. But the lenders are, for the most part,
different -- and so are the rules.

“My assessment is that the
development community has changed fundamentally,” said Christopher M.
Jeffries, a principal of Millennium Partners, the successful Upper West Side
development group. “The 80's were about greed on Wall Street and in real
estate; about money and the availability of money that caused real estate to be
developed that should not have been built.”

Before they lend a nickel to a
developer -- for new construction or the large number of major rehabilitation
projects around -- banks now demand substantial cash commitments up front from
the developers, sometimes as much as 40 percent. Banks are demanding “preleasing,
precommitments” -- written pledges from retail tenants -- anything they
can get to limit their risk.

If there are overruns during
construction, Mr. Jeffries and other developers say, the banks are requiring
that the amount of the overrun be made up -- right then and there -- from the
developer's pocket.

This new rigor, they say, has
resulted in a change in the way developers do business. The swashbuckler, the
loner-with-a-vision, has now been replaced by the development team. Even Donald
J. Trump says he has changed his style, accepting deals where he doesn't share
the profits until the investors take back the money they put in, and even
taking a commission as developer-for-hire. Ian Bruce Eichner, another major
developer who ran into trouble in the late 80's, just formed a joint venture to
develop two low-rise buildings in SoHo. Matthew Adell, who, along with his
father, Leonard, owns sizable chunks of three blocks on Sixth Avenue in the
20's, is one of the few developers with a big site who has, so far, managed to
hold out without taking an outside partner. Mr. Adell's focus for now is the
first of three rental buildings that he plans to put up. “We're just
putting on blinders and trying to move forward on this one alone,” Mr.
Adell said last week. “Maybe for the others we'll go with a joint
venture.”

For the largest development in
sight, the massive 5,700-unit Riverside South project, Mr. Trump swapped a
significant part of the project, including his ownership of the land beneath it
in return for Asian money to build. An executive in his organization said last
week he still retains 30 percent ownership of the project, with provisions to
increase that percentage as certain rental and sales goals are met.

In a deal that became known two
weeks ago, Mr. Trump has signed on in a joint venture with an Australian
insurance company to turn the St. Moritz Hotel into million-dollar condominiums
overlooking Central Park. In yet another new deal, Mr. Trump is the developer
hired to transform the Mayfair Hotel into condominium apartments; he does not
own a piece of the property.

In another new deal, Mr. Eichner,
the developer involved in several of the most spectacular tailspins of the
1980's -- he lost both Cityspire and 1540 Broadway, now the Bertelsmann
Building -- has formed a joint venture with Hank Sopher, who founded the real
estate firm that bears his name.

Mr. Sopher had the land, two
parcels across the street from each other in SoHo, on Houston Street between
Mercer and Greene; Mr. Sopher's previous plan to build a hotel had gone
nowhere. Mr. Eichner wants to build two low-rise apartment buildings, with 140
market-rate housing units. The $24 million for the project will come through
conventional sources, he said.

Mr. Eichner had earlier persuaded
the Union Labor Life Insurance Company (Ullico), a union fund manager that
invests in projects that employ union labor, to commit $33 million in long-term
loans for his almost-completed 25-story, 121-apartment condominium at 201 East
80th Street, called the Richmond.

SOMETIMES the partnerships and
joint ventures merely signify that a wealthy lending institution or individual
is brought in strictly to provide cash. But sometimes, as in the cases of Mr.
Trump and Mr. Eichner, a partner is brought in to perform development services,
in exchange for a percentage of the profits. In the same way, Millennium
Partners has banded together, not only with some German lending institutions,
but with Bovis Construction, a subsidiary of Lehrer McGovern Bovis, the
building contractor, according to Mr. Jeffries. The construction company was
given a share of some of the profits of all Millennium's West Side projects in
a 1992 agreement.

Although the developers themselves
tout the wisdom of such alliances, they do not disagree that the varying teams
were formed out of necessity. The developers need what the partners can provide
to satisfy the banks: land, expertise, credit and, especially, cash.

“The lenders are requiring
much more cash from the developers,” said Alan Wiener, head of American
Property Financing, one of the city's best known development finance
consultants. “And they want to get out quicker; even in today's hot
climate, banks are writing 'mini-' or 'bullet' loans; they want out in five
years.”

“The banks finally got
religion,” the financing consultant concluded.

The bankers agree.

“The bankers don't want to
revert to the late and mid-80's when so much was overbuilt,” said Murray
F. Mascis, head of the commercial real estate group at the Dime Savings Bank,
one of the banks that is now starting again to lend to developers -- “with
a lot of caution,” according to Mr. Mascis.

“Everyone's being a lot more
careful,” said William C. McCahill Jr., executive vice president of Fleet
Bank, generally considered a leader, if not a pioneer, in this generation of
development finance. Mr. McCahill, who is in charge of Fleet's loans in
metropolitan New York, formerly headed New York City development loans at
Chase.

Led by Fleet, a number of banks
and banking institutions -- some more warily than others -- have entered the
development fray. One of the biggest names in development loans during the
1980's, Citibank, is, in the words of one developer, “conspicuously
absent”; calls to the bank seeking comment were not returned.

To a large extent, the lenders most
active now are different from those in the 1980's.

“You're getting the
aggressive venture capital banks in the game now,” said R. Anthony
Goldman, of Goldman Properties, a developer who helped to revive SoHo and then,
as he says, “sat out the crash doing stuff in South Beach, Miami.”
Mr. Goldman, who is currently involved with seven properties in the Wall Street
area, said developers “are not adverse to going to Morgan Stanley,
Goldman Sachs, Lehman Brothers, First Boston . . . These are the folks that are
in the game now.”

The problem with this kind of
lender, Mr. Goldman said, is that they don't just want to lend. “They put
on the pressure,” he said. 'They'll only lend you the bucks you need for
purchase and development in return for a piece of the deal: either a share of
the profits or a piece of the deed. They want pieces.”

In New York City's nascent
construction market, Fleet Bank has taken a leadership position. But so has
Credit Suisse/First Boston, an investment bank, which has loaned over $800
million in New York City since April 1996.

William Adamski, a First Boston
director who is co-head of real estate investment banking for the New
York-based company, said his group was eagerly searching the city marketplace.

“We'll do it all,” he
boasted. “We do joint venture, equity, permanent financing, interim
financing. I guess you could say we're aggressive compared with three years
ago, but compared with 10 years ago, we're conservative.”

A look at some of First Boston's
current deals points out the diversity of financing methods now being used,
some of them rare or unheard of a few years ago when lenders put up the money
-- sometimes up to 100 percent of the costs of development -- and almost never
took an ownership share of the property, according to financing experts.

But now, First Boston is a
co-owner of 10 Hanover Square in downtown Manhattan, according to Mr. Adamski. “We're
a partner with Stellar Management and a limited partnership of individuals,”
he said. Like most of the downtown sites -- an area that has cheap property and
new tax incentives but that is still unproven, according to most developers --
10 Hanover will become rental units; “upwards of 375 of them,” Mr.
Adamski said.

At 25 Broad Street downtown, a
21-story office-to-residential conversion developed by a new face in the New
York development community, Crescent Heights of Miami, a partnership led by
Bruce A. Menin, Credit Suisse/First Boston holds the second mortgage; Ullico,
the labor union fund, holds the $53 million first mortgage. The project will
create 344 rental apartments; construction is about 20 percent along. First
Boston is also allied with Rockrose in its 576-unit rental project at 127 John
Street.

Some German banks, notably Hypo
Bank, (Bayerische Hypotheken-und Wechsel-Bank) have been lending in New York
City for several years.

Goldman Sachs had a “significant”
share in the third Lincoln Square building -- The Grand Millennium at 1965
Broadway, which has just been finished.

Colony Capital, a California-based
real estate investment company that has acquired $4.5 billion in real estate
since its founding six years ago, has recently started investing in New York
City real estate. In the last seven months, Colony has bought three hotels,
including the Mayfair and the Stanhope -- venerable institutions on,
respectively, Park and Fifth Avenues. They are the financiers who have hired
Mr. Trump to turn the Mayfair, at 65th Street in a prime spot of the Upper East
Side, into 75 multimillion-dollar condominiums.

Richard H. Ader, chairman of U.S.
Realty Advisors, was hired by Sun America, a California life insurance company,
to investigate development possibilities in New York City. Sun America
participated in the Brodsky Organization's latest project, the $150 million,
729 unit, 48-story rental, commercial and retail development between 58th and
59th Street on the west side of Ninth Avenue, a site formerly owned by St.
Luke's- Roosevelt Hospital. “The deal was led by Fleet and Hypo,”
explained Mr. Ader.

FOR a while, Mr. Ader continued,
Fleet and Hypo, the German bank, seemed to be the only lenders seen in the
marketplace. “I don't know if people thought the market wasn't going to
go up, or what,” he added. Now, he said, he knows that some of the “major
hitters,” banks such as Bankers Trust and Chase, are interested in
lending again. “And we just got a call from Key Bank, an Albany-based
bank,” he said.

Mr. Ader pointed to a fact of life
for today's developers: the banks want a lot of cash up front -- and
nontraditional lenders like Sun America can lend cash to the developers to
satisfy the banks' requirements. Even developers who can afford the new cash
requirements “still need partners,” he said. “They don't want
to keep their capital tied up,” he explained. “They all need equity
partners. We put up the cash, the developers put the building up and rent it
out; we bring capital, they bring expertise. It's definitely a trend. It's how
things will get built now.”

Bankers cheerfully admit that they
are being much tougher now.

“We require more equity and
we require guarantees of completion,” said Mr. Mascis, of Dime. “We
may offer a 10-year loan with a 5-year review; if we don't like what we see --
if the engineer's report shows a building that isn't being maintained -- we may
not renew the loan for the other five years. It gives us a little more control.

“Instead of lending 100
percent, as they did in the 80's, we're now only lending 70 percent,”
explained Mr. McCahill, of Fleet. This puts pressure on the developers, he
added, to “check and recheck their figures before closing.”

All this is paying off, according
to Mr. McCahill. “We haven't had any problems in this new generation of
loans.”

In the last two years, Mr.
McCahill's bank has become increasingly active in residential development
lending, including backing the $45 million Siena luxury condominium, at 186
East 76th Street -- a joint venture between Rose Associates, the Brodsky
Organization and Robert Quinlan -- and a 192-unit rental project built by
Donald Zucker on a vacant lot on the fringes of SoHo, on the northwest corner
of Elizabeth and Houston Street.

Fleet is also financing two of the
major development projects of Stephen M. Ross, chairman of The Related
Companies, LP: his Union Square retail/residential development and his rental
tower at 84th Street and First Avenue (both with Hypo Bank). Both projects are
the so-called 80/20 projects, in which developers trade 20 year tax abatements
and low-interest, government-guaranteed financing for their commitment to rent
20 percent of the building to low- to moderate-income tenants, who pay
approximately 30 percent of their income as rent.

To many developers, the 80/20
approach is still the approach of choice; that or participating in the
substantial amount of conversions from office to apartments in the financial
district, where the Mayor has implemented other tax incentives.

“Rentals, especially 80/20
rentals if you can get the financing, are still the safest way to go,”
said Mr. Adell, who, with his father, Leonard, has waited 17 years to start
construction on what they call the Center Six development on both sides of
Sixth Avenue between 25th and 28th Street in the Flower District. Last week,
Mr. Adell said construction on the 200-unit, $50 million first phase -- on the
west side of Sixth Avenue between 25th and 26th Streets -- would start sometime
this spring; a financial adviser familiar with the deal was doubtful that
ground would be broken so soon. The other two buildings are planned for the
east side of the avenue, between 26th and 28th Streets, now used for outdoor
flea markets on weekends.

Right now, the total project is
budgeted at $200 million, with 670 more rental apartments to come. Mr. Adell is
now planning for 80/20; but said he might decide to switch to condominiums for
the last two phases.

Mr. Mascis, from the Dime, agreed.
“We only finance projects under $20 million,” he said.

The biggest project of all -- an
estimated $3.2 billion if all 17 buildings are finished -- is Riverside South,
Mr. Trump's phased project on the Hudson River between 59th and 72d Streets.

Mr. Trump said he had changed his
approach for the first phase: from 1,800 80/20 rentals to 490 large
condominiums in a $175 million building at West 69th Street and 500 large
rental apartments in a $140 building between 68th and 69th Streets.

The first plan was for several
rental buildings to stretch between 64th and 68th Streets. The development, Mr.
Trump said, is being financed by a consortium of Hong Kong partners, including
New World Development Company Ltd.

Like the other developers, Mr.
Trump said the atmosphere for financing development projects in 1997 was far
different from what it was in the 80's. “They're more conservative,”
he said, “and also more sophisticated; there's foreign money and pension
money; there's a very different kind of lender.” General Electric Pension
is behind the joint venture that rebuilt Trump International Hotel and Tower at
1 Central Park West, formerly the Gulf & Western Building; the Ullico is
financing Mr. Trump in his $35 million rehabilitation of 40 Wall Street, which,
he says, will have a completed lobby in three weeks.

Mr. Trump prefers to build
market-rate housing, preferably condominiums in blue-chip locations, without
any kind of governmental restrictions. So does Trevor Davis, head of Davis and
Company, whose joint venture market-rate $40 million, 103 unit rental at 300
East 64th Street is now rented out.

SEVERAL weeks ago, Mr. Davis
closed on the land at the northwest corner of 33d Street and First Avenue, the
site of a now-demolished Mobil station. There, he and his German partners have
begun foundation work for a 22-story, 227-unit rental tower, made up of
studios, and one- and two-bedroom apartments.

Part of being a successful
developer, according to Mr. Davis, is knowing what to build in which location. “I
wouldn't build three- and four-bedroom units on 33d Street,” he said. “That's
not the market.”

Mr. Davis put his finger on
another of the difficulties facing today's developers: finding a good site.

With the new bank restrictions --
which almost always include a prohibition on lending money to assemble parcels
of land for a building site -- developers are searching for already assembled
sites; sites with tax incentives, primarily the downtown sites; sites that are
owned by someone else but somehow vulnerable, like the site owned by Mr. Sopher
in SoHo.

Mr. Wiener, the financial
consultant, pointed out that because the banks are refusing to fund assemblages
of small sites, much of the development that is going forward in 1997 -- and
most of what has happened in the last couple of years -- is taking place on
sites that already exist.

The Adells have owned their site
on Sixth Avenue between 25th and 28th Streets for years. So have the
Manocherian family, who have had their architect, Costas Kondylis, draw up
several renderings for a building on the massive site they have long owned at
the southeast corner of 23d Street and Sixth Avenue.

According to real-estate
consultants, Leonard Litwin, head of Glenwood Management, has purchased a site
at 38th Street and Second Avenue that was the site of a never-built condominium
project, and Joel Pickett of Gotham Development recently closed on a site on
43d Street between 10th and 11th Avenue -- a parcel he bought at a bank
foreclosure.

According to Mr. Eichner, whose
own development disasters were well publicized, the lenders should keep some of
the restrictions, particularly those on the percentage of cash required from
developers up front, but should loosen restrictions allowing the purchase of
assemblages. In fact, he said, the banks should generally loosen their purse
strings.

But, the developer was asked over
a cup of coffee, aren't developers like him the main reason banks are so wary?